The Semi-Visible Hand: The Quiet U.S. Agency Refereeing Foreign Investment in the United States

Welcome to the September 2019 edition of our newsletter!  In this issue, we’ll examine the Committee for Foreign Investment in the United States and the quiet but important role it plays in global investment.

Keeping Watch in an Open World: The Role and Growth of CFIUS

Formed in 1975, as the United States remained engaged in a Cold War with Russia and related geopolitical concerns around the Vietnam War, the committee – known as CFIUS, and led by the Treasury Department with input from Defense, Justice, State and others – developed as an interagency safeguard against foreign companies acting as covert agents for their host governments, secretly collecting sensitive information from U.S. companies in which they invested.  The threshold for CFIUS review of, say, a German bank’s venture capital arm investing in a U.S. automaker was previously very high, consisting of any transaction which could result in a foreign entity having majority control of the relevant U.S. company.  In 2018, a law was enacted to broaden the scope to include non-controlling investments as well as the acquisition of real estate, with the logic being to limit foreign government access to U.S. bank account information, as well as the introduction of “mandatory declarations” to be made by the relevant foreign government when the target acquisition is involved in critical infrastructure or technology, or has access to sensitive data, each of which was left rather broadly defined, at least until the February 2020 deadline to implement the new rules.

The intent of CFIUS remains similar to its original goal from more than 40 years ago, to safeguard U.S. intellectual property and national security.  Yet as globalization and technology have connected nations and their peoples in ways undreamt of by lawmakers in the 1970s, the agency’s scope and duties have had to evolve.  The 2018 reforms could, in theory, be used as a tool to slow or stop proposed acquisitions under the same national security and intellectual property grounds.  CFIUS records are generally accessible via the U.S. Freedom of Information Act, although they are likely to be limited in scope and possibly heavily redacted.  Nonetheless, if researching a company known or believed to have been part of a prior CFIUS review, records may be available.  If working with a non-U.S. entity seeking a  CFIUS review, thorough due diligence profiles of the senior leadership is advisable, to determine as much as possible the risks their backgrounds may pose during a review.  If current or former military or intelligence officials serve on a company’s advisory board, for example, they may be asked to step down as part of an approval.  Similarly, a look at a company’s existing assets and investments is warranted, as the nature of these could provide grounds for divestiture.

The 2018 reforms gave CFIUS broadly expanded powers with somewhat limited restraints on those powers.  In an interconnected world, companies seeking to take advantage of opportunities would be best served by bringing the same level of scrutiny upon themselves that the quiet inter-agency regulator is likely to visit upon them.